New Tax Will Likely Inflate India Tea Prices

India tea growers and processors anticipate price increases in April 2017 with implementation of the Goods and Services Tax (GST).

India tea growers and processors anticipate price increases in April 2017 with implementation of the Goods and Services Tax (GST).

India has largely avoided economic stagnation brought by falling commodity prices and is on pace to maintain sustained growth of 7% per year.

That is one reason the government is backing that nation’s first Goods and Services Tax (GST), a common means of financing expansion. The proposed tax is a dual program administered by both the central and state governments. Half of the nation’s states are expected to approve the GST by early September.

The tax is proposed to begin April 1. While the tax is expected to increase bilateral trade by $109 billion, not every industry is embracing the change. A minimum levy of 12% on tea would increase the cost to consumers by 6–8% according to industry association leaders. India is one of the world’s largest tea exporters but the great majority is consumed in the domestic market. The joint forum of representatives of the Assam Tea Planters’ Association (ATPA), the North Eastern Tea Association (NETA), the Bharatiya Cha Parishad (BCP), and the Tea Board of India (TBI) see an adverse impact.

Tea is classified as a plantation industry and is therefore exempt from various taxes. Growers pay only a state value added tax (VAT) that varies from 5–6%. In Assam and West Bengal the VAT is 0.5–1%, according to a report in the Business Standard.

Collectively, association representatives asked the central government of Assam to keep the tax below 5%. Because tea is categorized as agricultural produce, “the Income Tax Act considers only 60% of the income derived from growing and manufacturing tea as agricultural income,” according a memorandum made public by the forum. In a report published in the Business Standard, Assam’s state finance minister was asked to tax tea at a rate similar to flour, pulses, and sale.

Tea processors oppose a proposed 1% interstate transportation tax on movement of processed tea with or without a sale. Currently the tax is paid only when tea is sold.

Tea processors oppose a proposed 1% interstate transportation tax on movement of processed tea with or without a sale. Currently the tax is paid only when tea is sold.

In addition to rate increases, the GST legislation will introduce a 1% interstate transfer tax. This tax will apply “every time we need to shift the tea from a garden to a warehouse or an auction center in another state. This despite the fact that it is not a sale but a mere transfer,” complained Nirmal Khurana, chairman of the finance committee at the Indian Tea Association (ITA). Under existing law, tea is exempted from a central sales tax for interstate transfers if there is no sale.

Tata Global Beverage Chairman Cyrus P. Mistry explained that initially the GST will have an inflationary impact “but the long-term benefit is significant,” he told shareholders at the company’s 53rd Annual General Meeting.

The Economic Times quoted Piruz Khambatta, Chairman and Managing Director, Rasna, and Chairman of CII National Committee on Food Processing as saying “The biggest pros of GST is that we will have a single tax without the cascading effect of multiple taxes, so only value addition is taxed at each point that is a healthy international practice.”

GST is a welcome move as there will be more transparency in the system. “There will be a common market in the absence of the Central Sales Tax (CST) and entry tax,” says Vijay Setia, a leading basmati rice producer and past president of All India Rice Exporters Association. India produces 110 million metric tons of rice annually.

Sources: The Economic Times, The Business Standard